A Strategic Framework for Supply Chain Design, Planning, and Operation Introductions – Names, prior work experience including summer, what do students hope to get from class? Mention some prototypical supply chains we will use repeatedly in class – Wal-Mart, 7-Eleven, Dell and Compaq, Amazon and Borders, Supermarket and e-grocer, W.W. Grainger and McMaster Carr - our goal is to identify factors that drive supply chain success and make a comparison between different supply chains. Administration of course - We will discuss concepts and methodologies for supply chain management. The context within which both will be learnt and discussed is provided by cases. Discuss role of case packet readings, cases and book. 5 cases due - 10% for each case 25% for final project 20% for final exam 5% for electronic posting Discuss key dates for submitting project. Three groups will be selected to present. Show course web page and its organization

Outline What is supply chain management? A supply chain strategy framework Notes:

Traditional View: Logistics in the Economy (1990, 1996) Freight Transportation $352, $455 Billion Inventory Expense $221, $311 Billion Administrative Expense $27, $31 Billion Logistics related activity 11%, 10.5% of GNP. Notes: Traditionally logistics and supply chain management has been measured in terms transportation and inventory costs and the administration required to manage both. Traditionally firms would have an inventory manager and a transportation manager. This view is very narrow and causes significant problems in the proper functioning of the supply chain. Source: Cass Logistics

Traditional View: Logistics in the Manufacturing Firm Profit 4% Logistics Cost 21% Marketing Cost 27% Manufacturing Cost 48% Profit Logistics Cost Marketing Manufacturing Notes: Key message here is that logistics costs are a significant fraction of the total value of a product. The problem here is that this a purely cost based view of the supply chain and drives a firm to simply reducing logistics costs. This is an incomplete picture.

Supply Chain Management: The Magnitude in the Traditional View Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies A typical box of cereal spends 104 days from factory to sale A typical car spends 15 days from factory to dealership Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago

Supply Chain Management: The True Magnitude Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed When the 1 gig processor was introduced by AMD, the price of the 800 meg processor dropped by 30% P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand

What is a supply chain? P&G or other manufacturer Jewel or third party DC Jewel Supermarket Customer wants detergent and goes to Jewel Plastic Producer Tenneco Packaging Chemical manufacturer (e.g. Oil Company) Notes: Supply chain involves everybody, from the customer all the way to the last supplier. Key flows in the supply chain are - information, product, and cash. It is through these flows that a supply chain fills a customer order. The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows. Chemical manufacturer (e.g. Oil Company) Paper Manufacturer Timber Industry

Flows in a Supply Chain Supply Chain Customer Information Product Funds Supply Chain

Cycle View of Supply Chains Customer Customer Order Cycle Retailer Replenishment Cycle Distributor The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage. One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done. This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner. Manufacturing Cycle Manufacturer Procurement Cycle Supplier

Push/Pull View of Supply Chains Procurement, Customer Order Manufacturing and Cycle Replenishment cycles PUSH PROCESSES PULL PROCESSES In this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes. They key difference is the uncertainty during the two phases. Give examples at Amazon and Borders to illustrate the two views Customer Order Arrives

Examples of Supply Chains Dell / Compaq Toyota / GM / Ford McMaster Carr / W.W. Grainger Amazon / Borders / Barnes and Noble Webvan / Peapod / Jewel What are some key issues in these supply chains? Dell has three production sites worldwide and builds to order. Compaq does both. Consider some decisions involved - where to locate facilities? How to size them? Where is the push/pull boundary? What modes of transport to use? How much inventory to carry? In what form? Where to source from?

What is Supply Chain Management? Managing supply chain flows and assets, to maximize supply chain surplus. What is supply chain surplus? Notes: Supply chain surplus refers to what the customer has paid - total cost expended by supply chain in filling order.

The Value Chain: Linking Supply Chain and Business Strategy New Product Strategy Marketing Strategy Supply Chain Strategy New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources

Achieving Strategic Fit Understanding the Customer Lot size Response time Service level Product variety Price Innovation Implied Demand Uncertainty

Levels of Implied Demand Uncertainty Detergent Long lead time steel High Fashion Emergency steel Customer Need Price Responsiveness Low High Implied Demand Uncertainty

Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier High Low Cost High Low

Achieving Strategic Fit Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiveness spectrum Zone of Strategic Fit

Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Strategic scope must cover all boxes, at least at the supply chain end. Each stage must have fit across its vertical boxes and supply chain strategy spanning all players. This fit allows the countering of multiple owners and helps avoid local optimization. Marketing Strategy

Drivers of Supply Chain Performance Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain structure Drivers How does a supply chain make the efficiency / responsiveness tradeoff and position at the appropriate point - using Inventory, Transportation, Facilities, and Information decisions.

Considerations for Supply Chain Drivers

Supply Chain Decisions: Structuring Drivers Strategy (Design) Planning Strategic: How many warehouses should Amazon build? Where should they be built? Strategic decisions relate to allocation of resources. Planning: What titles are stocked in house? What replenishment policies to follow? Geographical responsibility by warehouse. Planning decisions relate to policies for utilization of resources. Operation: How is a specific order to be filled? From where? Shipping mode etc. Operation decisions relate to filling specific orders given resources. Discuss the time frame for each decision and how the strategic decision defines constraints for the planning decision which defines constraints for the operation decision. Operation

Major Obstacles to Achieving Fit Multiple owners / incentives in a supply chain Increasing product variety / shrinking life cycles / customer fragmentation Local optimization and lack of global fit Increasing implied uncertainty

Dealing with Multiple Owners / Local Optimization Information Coordination Contractual Coordination

Dealing with Product Variety: Mass Customization Long Lead Time Short Mass Customization Stress the importance of time compression in supply chain. Detail NPD time as well as material flow time. The advantage of lower flow times is magnified for short product life cycles. Consider a firm with a 10 day material flow time versus a 90 day material flow time(rough comparison of Dell and Compaq in Early 1998). For a six month product life cycle this advantage is significant. For a three year product life cycle this advantage is somewhat less significant. Base goal in a supply chain: Flow time reduction (this is what the operations course was all about) High Low Cost Customization Low High

Fragmentation of Markets and Product Variety Are the requirements of all market segments served identical? Are the characteristics of all products identical? Can a single supply chain structure be used for all products / customers? No! A single supply chain will fail different customers on efficiency or responsiveness or both. Notes: Dell is a niche player. Compaq has a broader set of customers served. Compaq cannot come up with a single supply chain that is best in all instances. The same case can be made for Amazon as well - different people use the web channel as either a convenience or to get a better deal. Currently Amazon is trying to satisfy both with a single supply channel. Is this appropriate in the long term.

Tailored Logistics Each Logistically Distinct Business (LDB) will have distinct requirements in terms of Inventory Transportation Facility Information Key: How to gain efficiencies while tailoring logistics? Notes: Clever here refers to the ability of a firm to service these different requirements in the most cost effective way without hurting customer service in any case. The key ability will be one to make the right tradeoffs and come up with optimal structures for communication, inventory, transportation, and location.

Applying the Framework to e-commerce: What is e-commerce? Commerce transacted over the Internet Is product information displayed on the Internet? Is negotiation over the Internet? Is the order placed over the Internet? Is the order tracked over the Internet? Is the order fulfilled over the Internet? Is payment transacted over the Internet?

Existing Channels for Commerce Product information Physical stores, EDI, catalogs, face to face, … Negotiation Face to face, phone, fax, sealed bids, … Order placement Physical store, EDI, phone, fax, face to face, … Order tracking EDI, phone, fax, … Order fulfillment Customer pick up, physical delivery

Revenue Impact of E-Commerce Length of supply chain Product information Time to market Negotiating prices and contract terms Order placement and tracking Order fulfillment Payment

Cost Impact of E-Commerce Facility costs Site and processing cost Inventory costs Cycle, Safety, Seasonal inventory Transportation costs Inbound and outbound costs Information sharing Coordination